​Clear signs of recovery for oil service companies: Yager

​Clear signs of recovery for oil service companies: Yager

If your definition of success is a return to 2014, you’ll be disappointed. But if you’re still in business after the past two years, this is a measurable and meaningful improvement for the part of the industry that’s chasing rigs.

The most frequently referenced barometer of oil service prosperity is the number of active drilling rigs. But this is only part of the story. There are multiple ways to measure progress or success.

The oil service recovery currently underway is not evenly distributed or positive for all participants. But after two years of contraction and misery, the outlook has improved sufficiently to justify optimism for most.

On January 20, JWN’s Rig Locator reported 340 rigs moving or making hole. This is the highest number in nearly two years since Feb. 10, 2015. Utilization is reported to be over 52 per cent, but that’s because the available rig fleet has shrunk to 653 from over 800.

At an average cost of $5 million per machine, nearly $750-million worth of drilling iron from two years ago is parked or obsolete. That’s a huge price for contractors to absorb for a modest mathematical increase in rig utilization.

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Service rig utilization is a broader measure because activities involving production workovers and abandonments, not just new well completions. The Canadian Association of Oilwell Drilling Contractors reported in November that 32 per cent of the 1,003 available service rigs were working, the highest rate in 2016 and the past year. In the dark days of early 2016, when wells went down, operators often couldn’t justify spending the cash to fix them.

That all changed with higher oil prices in mid-2016.

Oil prices are higher, but many don’t appreciate how much. On January 20, the Petroleum Services Association of Canada and GMP FirstEnergy commodity pricing report had synthetic crude at C$71.92 and Edmonton mixed sweet at C$65.92. Western Canadian Select, the perpetually depressed blend of bitumen, synthetic and condensate (mixed for easier transportation), fetched C$52.18.

Noteworthy is all three averaged more than $30/bbl higher than a year ago. For an industry producing 4.5 million bbls/d of these three crude types plus natural gas liquids (which have enjoyed a similar increase), this is $135 million/day more than a year ago. These are big numbers.

The ARC Energy Research Institute, a unit of ARC Financial, publishes a weekly macroeconomic report on the upstream petroleum industry. On January 16, ARC estimated 2017 revenue from all oil and gas production could be $110 billion, a whopping $32 billion (or 41 per cent) higher than 2016. Higher oil prices are aided by natural gas being expected to benefit from a 50 per cent boost this year. Revenue from existing production remains the number one source of cash flow for reinvestment. This explains why most operators have announced increased spending.

ARC estimates after-tax cash flow to more than double in 2017 to $45 billion from only $20 billion last year. This supports an estimated 40 per cent increase in capital spending on conventional oil gas from last year, to $28.8 billion compared to only $20.5 billion. While this is still lower than historical levels, the estimate does not anticipate improvements from capital inflows from new equity issues. As for debt, oil companies will be dedicating a meaningful portion of their improved financial fortunes to balance sheet repair.

If your definition of success is a return to 2014, you’ll be disappointed. But if you’re still in business after the past two years, this is a measurable and meaningful improvement for the part of the industry that’s chasing rigs.

The recovery is not even. ARC estimates oilsands investment will decline yet again to only $13.2 billion this year, the lowest level since 2009. It was $16.2 billion last year and $22.9 billion in 2015. For major processing projects, the $8.5-million North West Redwater Sturgeon Refinery construction is winding down. The workforce has been reduced by 2,000 in the past year and further reductions will follow. Start-up is anticipated for the latter half of the year. Two new projects totaling $7 billion from Pembina Pipeline and Inter Pipeline to build plastic feedstock plants have been announced, but they aren’t going to materially move the employment and trades needle for most of 2017.

The oilpatch is not yet firing on all cylinders. The macroeconomic uncertainty ranges from Donald Trump to pipelines to carbon taxes. Activity may never return to the go-go years of 2012 through 2014.